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Rakhi Vasavada, Financial and Legal Consultant

Category: Finance

Satisfied Customers: 4480

Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years

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I have been receiving PHI payments for some years now through

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I have been receiving PHI payments for some years now through an employer scheme, with the premiums paid by the employer and treated as a benefit in kind. My employer went bust a couple of years ago and since then I have received monthly payments direct from the insurance company with tax deducted at source. The insurance company has now offered me a lump sum in full and final settlement.

Is this lump sum taxable?If it is taxable, is it taxed as one years income?

The employer may provide the funds for sick pay directly or through a trust or insurance policy. Whichever method is used, the sums paid to employees are taxable as earnings within Section 62 or Section 221 ITEPA 2003.As the amount to be taxed is the same in either case it will not usually be necessary to decide which section applies. However, Section 221 covers the situation where the employee may have contributed to the fund that provides the sick pay. In such cases only that part of the sick pay attributable to the employer’s contributions are charged to income tax.

It will pay up to 60 per cent of your salary free of tax (or 75 per cent if it is an employer’s policy – but you are taxed on the income) either until you are able to resume work again, or until the plan expires, typically at 50, 55, 60 or 65 years of age.

Because the aim of a PHI policy is to replace earnings lost through sickness or injury without reducing your financial incentive to return to work, all policies set a maximum income benefit limit. This used to be 75% of average monthly earnings in the year before disablement, minus state benefits and benefits from any other disability insurance. But now PHI benefits are tax-free, the usual maximum benefit is between 50% and 60% of a claimant's gross salary, plus state benefits.

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Is this lump sum taxable?If it is taxable, is it taxed as one years income?

I am fully aware of how PHI monthly payments work and how and why they are taxed.

The insurance company are now trying to buy their way out of their liability to pay monthly payments by offering a one off lump sum in "full and final settlement of all liability under the claim". There is nothing in their offer that states the payment is an income.